AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 861:

  Under the expenditure approach, GDP can be calculated as the sum of:

  A. Consumption, money supply, government purchases, and exports.
  B. Consumption, investment, transfer payments, and imports.
  C. Consumption, investment, government purchases, and net exports.
  D. Consumption, investment, government purchases, and foreign exchange.
  C. Consumption, investment, government purchases, and net exports.

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  Choice "c" is correct. Under the expenditure approach, GDP is calculated as the sum of: consumption expenditures + investment expenditures + government purchases + net exports. Choice "a" is incorrect. See definition above. Choice "b" is incorrect. See definition above. Choice "d" is incorrect. See definition above.

• Question 862:

  This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment.

  Select, as the best answer for each item, the most likely source. Select only one source for each item.

  During our audit we discovered evidence of the company's failure to safeguard inventory from loss, damage, and misappropriation.

  A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.
  B. Auditor's communications on significant deficiencies in internal control.
  C. Audit inquiry letter to legal counsel.
  D. Lawyer's response to audit inquiry letter.
  E. Communication from those charged with governance to the auditor.
  F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
  G. Report on the application of accounting principles.
  H. Auditor's engagement letter.
  I. Letter for underwriters.
  J. Accounts receivable confirmation request. K. Request for bank cutoff statement. L. Explanatory paragraph of an auditor's report on financial statements. M. Partner's engagement review notes. N. Management representation letter. O. Successor auditor's communication with predecessor auditor. P. Predecessor auditor's communication with successor auditor.
  B. Auditor's communications on significant deficiencies in internal control.

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  Choice "B" is correct. Failure to safeguard inventory from loss, damage, and misappropriation is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.

• Question 863:

  When applying value chain analysis, a firm sends its production manager to visit the operations of its major supplier in an attempt to determine if there are cost-savings capabilities that could be implemented at the supplier's warehouse. The firm is performing which form of value chain analysis?

  A. Internal differentiation analysis.
  B. Internal costs analysis.
  C. Vertical linkage analysis.
  D. None of the above.
  C. Vertical linkage analysis.

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  Choice "c" is correct. Analyzing the vertical linkage of a firm means understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firm's operations. Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 864:

  In September 1996, ABC Co.'s operating plant was destroyed by an earthquake. Earthquakes are rare in the area in which the plant was located. The portion of the resultant loss not covered by insurance was $700,000. ABC's income tax rate for 1996 was 40%. In its 1996 income statement, what amount should ABC report as extraordinary loss?

  A. $0
  B. $280,000
  C. $420,000
  D. $700,000
  C. $420,000

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  Choice "c" is correct. For a loss to be reported as an extraordinary loss, the event causing the loss must be both unusual in nature and infrequent in occurrence. The earthquake in this case does meet these criteria so the loss is reported net of income tax effect as an extraordinary loss of $420,000 (60% of the total $700,000 loss). APB 30.11, .19-.26 Choice "a" is incorrect. Review the criteria for reporting an extraordinary loss. Choice "b" is incorrect. This is the tax effect of the loss. Review your calculations. Choice "d" is incorrect. It is not appropriate to report the full loss as an extraordinary loss.

• Question 865:

  Mailing disbursement checks and remittance advices should be controlled by the employee who:

  A. Approves the vouchers for payment.
  B. Matches the receiving reports, purchase orders, and vendor's invoices.
  C. Maintains possession of the mechanical check-signing device.
  D. Signs the checks last.
  D. Signs the checks last.

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  Choice "d" is correct. Mailing disbursement checks and remittance advices should be controlled by the employee who signs the check last. This employee is generally in the treasury department. Choices "a" and "b" are incorrect. Approving the vouchers for payment and matching the receiving report, purchase orders, and vendor's invoices are functions of the vouchers payable department. Choice "c" is incorrect. When a mechanical check-signing device is used, there is generally dual control. One person maintains possession of the device itself, and the other controls the signature plates. The person with possession of the device would not mail disbursement checks, since mailing should be done by the last check signer.

• Question 866:

  ABC Industries is analyzing a capital investment proposal for new equipment to produce a product over the next eight years. The analyst is attempting to determine the appropriate "end-of-life" cash flows for the analysis. At the end of eight years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000. ABC's effective tax rate is 40 percent. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis?

  A. $27,000
  B. $12,000
  C. $(18,000)
  D. $(30,000)
  B. $12,000

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  Choice "b" is correct. $12,000 "end-of-life" cash flow. The $75,000 loss on disposal is a non-cash reduction in taxable income that will reduce taxes paid by $30,000 (75,000 ?40%). The cost to remove the equipment is a cash expense that will reduce taxable income by $40,000 and reduce taxes paid by $16,000 (40,000 ?40%), resulting in a net cash expense of $24,000 ($40,000 minus $16,000, or $40,000 ?60%). The $10,000 salvage value will increase after-tax cash flow by $6,000 (10,000 ?60%). Choices "a", "c", and "d" are incorrect, per the above calculation.

• Question 867:

  Due to a decline in market price in the second quarter, ABC Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in ABC's interim income statements?

  A. Ratably over the second, third, and forth [sic] quarters.
  B. Ratably over the third and fourth quarters.
  C. In the second quarter only.
  D. In the fourth quarter only.
  D. In the fourth quarter only.

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  Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time. Choice "a" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters. Choice "b" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters. Choice "c" is incorrect. Since the loss is not probable at the end of the second quarter, no amount should be recognized at that time.

• Question 868:

  In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should:

  A. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement.
  B. Describe the laws and regulations that the entity must comply with.
  C. Provide an opinion on overall compliance with laws and regulations.
  D. Indicate that the auditor does not possess legal skills and cannot make legal judgments.
  A. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement.

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  Choice "a" is correct. Basic elements of a report on compliance include a statement that tests of compliance with laws, regulations, contracts, and grants that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement. Choice "b" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply. Choice "c" is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations. Choice "d" is incorrect. While the auditor does not possess legal skills and cannot make legal judgments, it is not necessary to disclose this in the report.

• Question 869:

  For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders' derivative suit in the name of the corporation?

  A. To compel payment of a properly declared dividend.
  B. To enforce a right to inspect corporate records.
  C. To compel dissolution of the corporation.
  D. To recover damages from corporate management for an ultra vires management act.
  D. To recover damages from corporate management for an ultra vires management act.

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  Choice "d" is correct. A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director's or an officer's scope of authority and thus is a breach of duty to the corporation. Choices "a", "b", and "c" are incorrect, because these would all be causes of action against the corporate directors or officers on behalf of the stockholder to recover damages or seek some other remedy against the corporate directors or officers on behalf of the stockholder, not on behalf of the corporation.

• Question 870:

  To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by:

  A. The staff accountant who performed the substantive auditing procedures.
  B. The managing partner who has responsibility for all audit engagements at that practice office.
  C. A manager or partner who has a comprehensive knowledge of the client's business and industry.
  D. The CPA firm's quality control manager or partner who has responsibility for the firm's peer review program.
  C. A manager or partner who has a comprehensive knowledge of the client's business and industry.

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  Choice "c" is correct. The manager and partner on a specific job generally bear a great deal of responsibility for the audit and the report. Typically they would perform analytical procedures during the final review stage, to evaluate overall financial statement presentation and to assess the conclusions reached. In order to evaluate the results of the analysis and to perform an effective review, the manager or partner should have a comprehensive knowledge of the client's business and the industry. Choice "a" is incorrect. It is more effective to have a manager or partner perform this review rather than a staff accountant, because the manager or partner is generally more experienced and knowledgeable, and because it provides a double check on the work of the staff accountant. Choices "b" and "d" are incorrect. The managing partner and the quality control manager or partner might not have a comprehensive knowledge of the client's business and industry.